The US will be the only advanced economy to recover from the pandemic

US will be the only advanced economy to recover from the pandemic

Last week, the International Monetary Fund insisted on updating its World Economic Outlook (WEO) on the growing gap that separates the recovery of advanced economies from emerging and developing markets. A disparate improvement that for Bank of America (BoA) experts underestimates the uneven trend across many countries.

The institution led by Kristalina Georgieva blames the growing openness on the low levels of vaccination and the scarce fiscal stimulus in the poorest countries. The IMF estimates that, on average, 40% of people are fully vaccinated in advanced economies, but vaccination rates are in the single digits in much of emerging markets, with almost zero implementation in some countries from the low-income group.

At the same time, they point out how the fiscal response to the crisis unleashed by Covid-19 is also very uneven, with a fiscal stimulus of between 4% and 25% of GDP in developed countries, between 1 and 14% in the main emerging economies and even lower in the poorest countries.

USA in the lead

Even so, Bank of America insists that the differences in the recovery that the main advanced economies are currently experiencing are almost as impressive as the difference with their emerging peers. To demonstrate this, US bank economists have measured the magnitude of the yield gap by looking at average growth between 2020 and 2023 compared to normal trend growth.

According to this indicator, it is expected that only the US will more than reach full employment again while the United Kingdom, the eurozone and Japan will be far from full recovery. Among emerging markets, China and a few other Asian countries will fully recover, but most of the countries in this group will lag behind. The biggest difference between the BoA and IMF projections lies in four factors that will continue to drive an exceptionally strong US economy.

First, the US fiscal stimulus is far from being exhausted. Regardless of what happens to the current bills on the table, it is likely that in the next six months a large package financed mainly by the deficit will be presented.

Second, analysts underestimate the impact of excess savings accumulated in US bank accounts. The numbers are enormous: relative to the pre-pandemic trend, the pandemic has risen by $3.5 trillion (15% of GDP) in the US, compared to $700 billion (3% of GDP) in the area. euro.

On the other hand, relative to the current economic outlook, the Federal Reserve remains the most accommodative central bank relative to its peers. No other central bank has the triple objective of exceeding the inflation target, full employment, and creating an “inclusive economic recovery.”

Fourth, Bank of America economists believe that analysts underestimate the momentum of growth when supply constraints ease. The bank projects that most of the price increases in recent months are temporary and will decrease in the autumn.